Storm disrupting work for millions may slow economic growth

Oct. 31, 2012

A man cleans up the remains of his food store damaged by Hurricane Sandy in New York's South Street Seaport, Tuesday. Atlantic superstorm Sandy may cut U.S. economic growth as it keeps millions of employees away from work and shuts businesses from restaurants to refineries in one of the nation's most populated and productive regions. / RICHARD DREW/AP

Written by

Jeff Kearns

Bloomberg News

Atlantic superstorm Sandy may cut U.S. economic growth as it keeps millions of employees away from work and shuts businesses from restaurants to refineries in one of the nation’s most populated and productive regions.

The storm may cut output in the world’s largest economy by $25 billion in the fourth quarter, according to Gregory Daco, a U.S. economist at IHS Global Insight. He said that could reduce the fourth quarter pace of growth to a range of 1 percent to 1.5 percent, from the firm’s earlier estimate of 1.6 percent.

Sandy lashed a region with 60 million people — about as many as Italy — that accounts for about a quarter of the $13.6 trillion U.S. economy, estimated Eric Lascelles, the Toronto- based chief economist at RBC Global Asset Management Inc. It forced the temporary closings of U.S. financial markets, halted air and rail service and idled workers for the federal and state governments from Virginia to Massachusetts.

“If people aren’t going to Broadway shows and restaurants and hotels, all those businesses that rely on people spending money are going to take a hit for sure,” said Stephen Bronars, a senior economist at Welch Consulting in Washington and an adjunct professor at Georgetown University. “People are still going to go out and buy a car or other durable goods they need, they’re just not going to do it this week. There will be winners and losers.”

The storm may reduce gross domestic product by as much as 0.2 percentage point this quarter, said Mark Vitner, a senior economist at Wells Fargo & Co. in Charlotte, North Carolina. The cost in lost output may come to about $30 billion, he said.

The storm will probably have “a modest negative effect of a few tenths of a percentage point” on retail sales, construction spending, and industrial production in October, Goldman Sachs Group Inc. economists led by New York-based Jan Hatzius wrote in a note to clients today. The indicators then may show “slightly stronger growth than would otherwise have been the case” into the first few months of 2013, they said.

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U.S. stocks declined as trading resumed for the first time this week. The Standard & Poor’s 500 Index fell 0.4 percent to 1,406.69 at 11:45 a.m. in New York. Gasoline jumped 4.5 percent as fuel suppliers bought November futures contracts to cover near-term delivery agreements after Sandy closed terminals and pipelines.

Sandy may cut November same-store sales by as much as 3 percent after retailers shut locations along the East Coast, according to an Oct. 28 note from Oliver Chen, an analyst at Citigroup Inc. in New York. At the same time, supermarkets and home-improvement stores such as Home Depot Inc. may benefit.

The physical damage wrought by Sandy is poised to exceed $20 billion after the storm slammed into the East Coast, damaging homes and offices and flooding the New York City subway system. The total would include insured losses of about $7 billion to $8 billion, said Charles Watson, research and development director at Kinetic Analysis Corp., a hazard- research company in Silver Spring, Maryland.

Sandy probably will have a bigger impact on the economy than Hurricane Irene in August 2011, which caused flooding and cut power to almost 6 million U.S. homes and businesses from North Carolina to Maine. One reason: Sandy struck on a Monday rather than a Sunday, idling a larger number of workers, according to Daco at IHS in Lexington, Massachusetts.

Disruptions Linger

“Usually disruptions to business activity are smaller than the infrastructure damages, which was the case with Irene last year,” Daco said. “This hit us at the beginning of the week and hence the disruptions are likely to linger through the rest of the week.”

Such disruptions may help push total economic losses to $30 billion to $50 billion, according to estimates by Daco and colleague Nigel Gault at IHS.

The U.S. economy expanded at a 2 percent pace in the third quarter, to an inflation-adjusted $13.6 trillion, after climbing 1.3 percent in the prior quarter. Economists project GDP will grow by 2 percent next year, according to the median of 89 estimates in a Bloomberg survey taken Oct. 5-10.

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Some of the loss in economic activity will be recouped during reconstruction, says Mike Englund, chief economist of Action Economics LLC. Days of lost productivity and destruction of infrastructure will be followed by a burst of activity and money spent on repairs.

“On net, the rebuilding effect exceeds the disruption effect, but only by a small amount,” said Englund, who is based in Boulder, Colorado. “We might find by the end of the fourth quarter repair would be a small positive for the quarter. It certainly won’t be a negative.”

That’s the view reflected in a Bloomberg survey of 25 economists. Sandy will cut 0.15 percentage point from growth in the fourth quarter of this year, according to the median forecast. In the first quarter of next year, it will add 0.1 point to growth.

“The wealth of the country has been impacted, however, there is likely to be catch-up activity,” El-Erian, chief executive officer at Newport Beach, California-based Pimco, said during an interview yesterday with the Toronto-based BNN television network. “It’s not clear at the end of the day that GDP, which measures activity, would be negative.”

Effect Magnified

Still, while lost production may take “a little bit of a nick out of GDP,” the effect is magnified because of the slow pace of the expansion, according to Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio.

“When you’re only growing 2 percent, a quarter of a percent or a half a percent is getting to be a lot,” he said.

Oil companies were among those affected by the storm. Phillips 66 shut down its refinery in Linden, New Jersey, and Hess Corp. closed a facility in Port Reading, New Jersey, the Energy Department said. The Hess facility doesn’t process crude oil. Other refineries in New Jersey, Pennsylvania and Delaware reduced output, according to the department.

“We are likely to see an accumulation of crude supply and a shortage of refined products in the coming days which will inevitably put upward pressure on gasoline prices,” Daco and Gault of IHS wrote in a research note yesterday.

The storm may skew some economic indicators as companies shut down during the storm and then boost production later, according to Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh.

“A lot of the heavy industries, the refineries, they’re shut down, then they come back up,” Hoffman said.

The storm is also disrupting the release of economic data.

The New York-based Conference Board postponed release of its consumer confidence report until 10 a.m. tomorrow. It was initially slated to be issued yesterday at the same time.

The Labor Department will issue its monthly employment report for October, the last to be published before the presidential election, as scheduled on Nov. 2, a spokesman, Gary Steinberg, said today.

The median forecasts of economists surveyed by Bloomberg call for payrolls to rise by 125,000 workers in October and for the jobless rate to increase to 7.9 percent from 7.8 percent. The storm won’t affect the reports because surveys of companies and households were conducted in the middle of the month.

55 Deaths

Natural disasters can boost growth, even as they take a toll in human suffering, some economists said. Fifty-five deaths were reported in the U.S., according to the Associated Press. The storm killed 69 people in the Caribbean, the AP said.

“It’s going to wipe out a lot of economic activity at first, then make some of the data look better,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama. “You have a big negative impact that’s reversed by the construction activity, but people always seem to focus on the rebuilding and not what was lost.”

Japan’s economy shrank at a 7.9 percent pace in the first quarter of 2011 after the earthquake and tsunami in March of that year killed thousands and unleashed the world’s worst nuclear crisis since Chernobyl. It rebounded to a 6.9 percent growth pace in the third quarter of 2011 as government spending kicked in for reconstruction efforts.

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Repairing storm damage may give the economy a boost in November, said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit.

“We could see some recovery in the numbers if there’s infrastructure that needs to be replaced,” Price said. “From a long-term view we should recover from the storm.”

Subways and electricity in the nation’s financial capital will be out of service for days after a record storm tide spilled over seawalls in Lower Manhattan and flooded tunnels connecting Wall Street to Brooklyn and New Jersey. The New York Stock Exchange and other U.S. equity markets reopened today after trading was halted for two days in the longest weather- related shutdown since 1888.

While disasters disrupt the economy as businesses shut down and workers stay at home, the property losses they cause don’t figure in GDP calculations, according to Vitner of Wells Fargo.

“Damage doesn’t reduce GDP, it’s the loss in output that does,” Vitner said. “The stuff that was damaged was actually produced a long time ago, so it doesn’t subtract from GDP. As people replace things that were damaged it’ll eventually add to GDP, but I think that’s more likely to happen in 2013.”

At Welch Consulting, Bronars, whose firm provides labor and employment analysis for companies, law firms and governments, took issue with that assessment.

“It’s just less negative because people are getting back to work and fixing things, but it could have been better if they were building new things,” he said. “If it was that simple we could just break stuff and then fix it to get things going.”